Buying A Short Sale Home Using An FHA Home Loan Just Got Tougher

Securing an FHA mortgage to buy a short sale home is about to get more expensive meaning tougher for some folks.

In a statement issued on January 20, 2010, the Federal Housing Authority – FHA – outlined policy changes to its mortgage lending programs. These policy changes indicate a major shift away from making housing affordable and available for many Americans – which has been the FHA’s mission since its inception. It appears that the agency is making a move to ensure that only those homebuyers who can afford to buy a home and who have demonstrated some credit worthiness are going to be able to use the FHA home mortgage programs to purchase a home.

To read the FHA’s statement, it’s clear what the group is trying to balance. On one side, the FHA wants to provide affordable financing to families that need it. That’s its mission statement. On the other side, though, the FHA must manage the risk that comes with insuring lesser-quality loans.

To that end, the FHA is stepping up its enforcement of “bad lenders” in hopes of stopping problems where they start.

Also in its new policies, the FHA is introducing a “termination clause”. If banks or loan officers that produce more than their fair share of bad loans, they lose their right to originate FHA mortgages.

All of these changes spell bad news for consumers as they can expect higher costs and needing more money to buy a home using any FHA home mortgage program.

Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%

Minimum downpayments for applicants with sub-580 FICOs are rising to 10 percent

Seller concessions are being limited to 3%, down from today’s allowable 6%

Furthermore, the FHA has appealed to Congress to raise an FHA borrowers’ monthly mortgage insurance premiums.

As a result of all these changes, homebuyers should expect tougher FHA underwriting in 2010. Not because the FHA says so, necessarily, but because banks don’t want to do “bad loans”. Lenders are incented to turn down at-risk applicants and, already, we’re seeing examples of this. Despite FHA allowing 580 FICOs and lower, many banks have made 620 their minimum.

Some have other guideline overlays, too.

The FHA’s new guidelines don’t go into effect until spring. So, between now and then, the old guidelines will apply. Therefore, if you know you’re going to need an FHA home loan in the next few months, consider moving up your time-frame.